Service rationing and social welfare maximization

Jul 26, 2012 •

It's fairly typical for direct service organizations to lament that demand for services out paces supply. In the free market when demand exceeds supply sellers increase prices, as the seller's focus is maximizing profits.

In the social sector, our focus is maximizing social benefit, yet outside of the medical world (where triage dictates the worst of individuals capable of survival get treated first) there is no such rationalization around service rationing.

Through my work, I visted with two programs recently, one that supplies affordable housing vouchers for homeless individuals and another that places low-income youth in summer jobs with stipends. Both organizations face greater demand for services than they can afford, meaning they each have to turn a significant number of people away.

I asked both program directors how they decide who receives services, and in both cases they simply service people on a first-come, first-served basis.

The problem with first-come, first-served is that those who show up for services first might not be the best fit to maximize social welfare. Going back to the example of the for-profit world, if you have ten tickets to a concert to sell, and the first five people in line are willing to pay a dollar, and the next twenty are willing to pay thirty dollars each, you would deny the first five people and select the next twenty.

But in the social sector, when we select people on a first-come, first-served basis, we are willing to serve those who might need the service less, or be less likely to succeed, than if we selected someone else.

The difficulty is that we think about service rationing in terms of eligibility instead of social welfare maximization. If someone qualifies for our program, they are in, even if other indicators suggest that the selected individual might drop out of the program soon after enrollment, or that her or his need for the service is far more modest than the person behind them in line.

In order to maximize over social welfare, we have to define what social welfare means to us. This definition stems from the outcomes identified in your logic model's impact theory. In the case of the affordable housing program, the desired outcome might be to minimize the number of years of life lost due to homelessness. Under this framework, we would have a preference for serving individuals who are at a greater risk of lower life expectancy due to their homelessness, than simply taking every person who is homeless until vouchers run out.

The distinction I'm making here is eligibility (as being homeless makes you eligible), and what our social welfare maximization framework is. The social welfare maximization framework gives us a way of prioritizing service delivery between two individuals who otherwise qualify for services.

In the case of the youth workforce development program, while all low-income youth would qualify for services, we might have a preference for placing people into the program who are likely to complete the internship. In this case, one could use historical data to fit a predictive model that provides some insight into what characteristics made an individual more or less likely to have completed the program in the past. Under this framework, social welfare maximization would involve not only placing people into the program, but maximizing the number of people in the program who complete the internship.

Supply and demand issues have long plagued the social sector, in both economic booms and busts. Therefore, we need to be smarter about how we allocate our scarce resources. The first step in better allocation of resources is a well defined impact theory that clearly identifies an organization's intended goals. From there, one can develop a utility maximizing framework that learns from historical data to better optimize allocations through time.